VAT – a minor change which could mean major headaches

The fundamentals

The starting point is that most property transactions are exempt from VAT (i.e. no VAT is chargeable on sale prices or rent, etc.), unless the property owner exercises an option to tax. If a property owner chooses to exercise an option to tax, VAT will be charged at the standard rate on any supplies of that property which, in turn, allows VAT incurred on costs to be recovered. The majority (but not all) of UK commercial property is subject to an option to tax.

Those dealing with property owners (purchasers, tenants etc.) need to be satisfied that VAT is properly chargeable on a transaction and will seek evidence or confirmation of this fact as part of their due diligence.

The change

Until now, HMRC has issued acknowledgement letters (or, more recently, receipt letters) confirming that an option to tax notification has been received and recorded by HMRC. A paper trail was therefore created.

From 1 February 2023, HMRC will stop issuing option to tax receipt letters. Instead, an option to tax notification which is sent by email will generate an automated response from HMRC confirming the date of receipt of the notification. A notification sent other than by email will not get an acknowledgement or receipt.

HMRC will only respond to a request for confirmation of the existence of an option to tax where:

• The effective opted date is likely to be more than six years ago; or
• The query is raised by an LPA receiver or an insolvency practitioner, to administer the property

The impact

Going forward, those exercising an option to tax should do so by email and should retain HMRC’s automated response with their VAT records as evidence of the notification.

Anyone who notifies other than by email will find it difficult to satisfy a future purchaser/tenant that an option to tax has been validly exercised. Similarly, property owners with imperfect historic record-keeping may not know if an option to tax has been made or may not be able to evidence it. Previously, they could have sought confirmation of the status from HMRC but now tax advice may be needed as to whether the option to tax can and should be confirmed by a further notification.

Those involved in property transactions should consider these issues at an early stage so that any uncertainties can be resolved.

https://www.gov.uk/government/publications/revenue-and-customs-brief-1-2023-changes-in-processing-option-to-tax-forms-by-the-option-to-tax-national-unit